Do employees who compare themselves to the CEO matter for executive compensation? Using German establishment-level wage data, we show that employee wages are increasing in CEO compensation. When CEO compensation increases by 1%, the median employee’s wage increases by about 0.04%. Higher CEO compensation also increases the probability for the existence of employee stock ownership plans. We establish causality by using a difference-in-difference approach. Our findings suggest that behindness aversion of employees is an important driver of wages and increases the costs of executive compensation significantly.

JEL Classification: D63, G02, G34, J31

Keywords: CEO compensation, behindness aversion, employee wages ∗